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Extreme Value Theory and the Financial Crisis of 2008

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The original paper I referred here has quite simply disappeared; maybe my reference gave it the ‘kiss of death’!

Recently I have learned that if I come across an interesting paper which is un-published or buried deep within a book, I can use the title to find material ’around’ the paper or other authors citing the paper I liked (even derivatively).

My interest in ‘Extreme Value’; is the influence of Professor McNeil of course! Since I cannot change the physical name of an old blog title without being severely shouted at by my boss (Peter Lindmark) I have used this technique here; it has been “extremely” useful!

Below is some material I found using that technique; this is a topic area of interest to me right now (July 2012);

I call it …..



Some references


Bank Lending During the Financial Crisis of 2008

THIS PAPER BELOW IS QUITE SIMPLY FANTASTIC !!! (remarkable how quickly they got it published)

LINK : http://asymptotix.eu/lml

Victoria Ivashina, Harvard Business School & David Scharfstein

Harvard Business School and NBER April, 2008


This paper documents that new loans to large borrowers fell by 47% during the peak period of the financial crisis (fourth quarter of 2008) relative to the prior quarter and by 79% relative to the peak of the credit boom (second quarter of 2007). New lending for real investment (such as working capital and capital expenditures) fell by only 14% in the last quarter of 2008, but contracted nearly as much as new lending for restructuring (LBOs, M&A, share repurchases) relative to the peak of the credit boom. Banks that have access to deposit financing cut their lending less than banks with less access to deposit financing. In addition, there is a large overhang of revolving credit facilities, which may also have curtailed lending. We document an increase in drawdowns of revolving credit facilities. Many of these drawdowns were undertaken by low credit quality firms concerned about their access to funding. While helpful to these borrowers, they may limit the ability of banks to make other loans. Banks with more revolving lines outstanding relative to deposits reduced their lending more than those with less revolving line exposure

FUNKY APPROACH (BELOW) More pure EVT than ‘Breakdown’ but hey, a funky approach .. (& Kiwis are honorary Scots, are they not?)

LINK : http://asymptotix.eu/lma

Bayesian Extreme Value Mixture Modelling for Estimating VaR

Xin Zhao, Carl John Scarrott, Marco Reale, Les Oxley

Department of Mathematics and Statistics, University of Canterbury, Christchurch, New Zealand

Department of Economics, University of Canterbury, Christchurch, New Zealand



A new extreme value mixture modelling approach for estimating Value-at-Risk (VaR) is proposed, overcoming the key issues of determining the threshold which defines the distribution tail and accounts for uncertainty due to threshold choice. A two-stage approach is adopted: volatility estimation followed by conditional extremal modelling of the independent innovations. Bayesian inference is used to account for all uncertainties and enables inclusion of expert prior information, potentially overcoming the inherent sparsity of extremal data. Simulations show the reliability and flexibility of the proposed mixture model, followed by VaR forecasting for capturing returns during the current financial crisis.

An EVT primer for credit risk

Valerie Chavez-Demoulin, EPF Lausanne, Switzerland, Paul Embrechts, ETH Zurich, Switzerland

First version: December 2008; This version: May 25, 2009



We review, from the point of view of credit risk management, classical Extreme Value Theory in its one–dimensional (EVT) as well as more–dimensional (MEVT) setup. The presentation is highly coloured by the current economic crisis against which background we discuss the (non–)usefulness of certain methodological developments. We further present an outlook on current and future research for the modelling of extremes and rare event probabilities.

LINK : http://www.math.ethz.ch/~baltes/ftp/EVT_primer_CR.pdf


Systemic Risk in the EU / Contrasting “inter-sector” and “intra-sector” spillover risk

Lauren Duijvestijn, Stefan Straetmans

Maastricht University School of Business and Economics



We analyse extreme return spillovers between banks, sovereign debt and real estate as well as with other EU industry sectors (“systemic risk”). We also quantify to what extent the magnitude of these spillovers increased during the current crisis. Statistical extreme value analysis is put at work in order to identify these spillover risks (as expressed by joint likelihoods of sharp drops in asset prices). The paper starts with a univariate part to

evaluate the tail risk (or “extreme” Value-at-Risk) for each bank, real estate and government bond index separately. The estimation of tail-VaR exploits the empirical stylized fact that financial returns are fat tailed. Nonsurprisingly, the extreme VaR significantly increased during the crisis. The paper’s bivariate part identifies the likelihood of extreme sectoral spillovers by means of Huang’s (1992) non-parametric estimator for the tailcopula. Intra-sector linkages are found to dominate inter-sector linkages and domestic linkages generally exceed cross-border linkages. In line with the univariate downside risk results, systemic risk seems to have increased for nearly all considered pairs. Finally, there is some evidence of a flight to quality effect into government bonds.



..... page re-designed 15th July 2012

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